U.S. Futures Follow Europe Modestly Lower; Asia Closes Mixed

May 14, 2014 9:07 AM ET

This morning. U.S. equity futures are lower and near the bottom of their morning trading range. In Asia, equity markets closed mixed. In Europe, equities indexes are modestly lower, with greater weakness in Milan. The dollar is weaker. Treasury 10-year yields are lower and near their lowest level of the year. The worldwide sovereign bond market rally continues. Commodities are mostly higher. Thursday's Nikkei 225 June 2014 (NKM4) equity futures are moderately lower.

Despite yesterday's record S&P 500 (SPX), DJ Industrials (DJI), and DJ Transports (TRAN) record closes, the gains came on reduced volume, which was below Monday's and Friday's lower consecutive volumes. The market outlook remains unchanged at "in correction". On April 4th, the U.S. equity markets distributed, and the market outlook worsened to "in correction", ending a brief "confirmed uptrend" that began on April 1st. The SPX opens at its 2nd consecutive record close.

Economic reporting is light. Commentary focuses on earnings and commodity and currency developments.

Trading desks again report quiet overnight sessions, with a mixed Asian close and lower European stocks in early afternoon. Japan benefited on merger announcement, while in China, Hong Kong rallied while Shanghai eased. Europe opened slightly higher, but immediately weakened to mid-morning lows, then traded narrowly. On the Russian front, all remains relatively quiet. In yesterday's trade, trading desks found resistance above SPX 1900. A Bank of America/Merrill Lynch fund survey found cash at its highest level in two years and reduced risk-taking, based on fears of global instability and lower global growth.

Momentum sectors closed lower. The Russell 2000 (RTY) fell -1.10%, and the Nasdaq Internet Index (QNET) and Nasdaq Biotech (NBI) closed lower and remain deeply in correction. The path of least resistance appears higher, but moves to 1915-1920 are likely to be sold, within a higher 1850-1900 trading range. Relative strength indicators don't suggest that the market is particularly overbought, though 17.2x price earnings multiples are well in excess of 15.9x historical average.

Tuesday, on lower and below average volume, U.S. major equity indexes opened higher, but closed mixed. The S&P 500 (SPX) and DJ Industrials (DJI) rose +0.04% and +0.12%, respectively, while the Nasdaq and NYSE composite eased -0.33% and -0.01%. Notably, the DJI and DJ transports (TRAN) both closed at a record highs. The TRAN rose +0.46%, confirming the DJI's record close according to DJ Theory.

NYSE volume fell -5.72% to 0.85x its 20-day moving average. The SPX, DJI, and NYSE composite are now +2.66%, +0.84%, and +2.91% higher in 2014, respectively, while the Nasdaq is down -1.11%.

Other notable indexes closed lower. The Russell 2000 (RTY) fell -1.10%, while the Nasdaq Internet (QNET) and Nasdaq Biotech (NBI) fell -0.38% and -0.77%, respectively. The QNET and NBI are both in correction, down -17.1% and -15.7%, respectively, from their respective early March and late February highs.

The 1Q2014 earnings reports began on March 15th, and 457 of 499 SPX companies have now reported, with respective +6.31% EPS and +0.27% revenue surprises.

This morning, 10-year U.S. Treasury yields are down -3.94 bps at 2.5695%, compared to the prior close. World sovereign bond markets continue to rally. Notably, Spanish and Italian 10-year debt yields are near their lowest levels since 2005, at 2.85% and 2.90%, respectively, compared to 2.90% and 2.94% the prior day.

U.S. options markets are unchanged at neutral to bullish, compared to neutral to bullish the prior day. The CBOE SKEW remains above a neutral range.

In pre-market futures trading, June SPX equity futures (SPM4) price near the bottom of a 1890-1897 trading range. After a fair value adjustment of -0.60 points, the SPM4 future prices at 1891.50, down -2.15 points. The SPX opens +1.16% and +1.60% above its respective 20- and 50-day moving averages, and +2.85% and +6.37% above its 200-day moving averages. Initial resistance is 1901.06. Initial support is 1894.95, then 1892.45.

In Asia, equity markets closed mixed. The Nikkei 225 (NYSEARCA:NKY) fell -0.14% and remains in correction, with its 50-day moving average below its 200-day moving average and its 200-day moving average now below its 100-day moving average. The Hang Sang index (HSI) closed up +1.03%. The Shanghai composite (SHCOMP) fell -0.14%. Both HSI and SHCOMP 50-day moving averages are also below their respective 200-day moving averages. Today's volumes are unavailable.

This week, the NKY, HSI, and SHCOMP are up +1.45%, +3.29%, and +1.83%, respectively. Last week, the NKY, HSI, and SHCOMP closed down -1.78%, -1.79%, and -0.75%, respectively. In May, the NKY is up +0.71%, the HSI is up +2.03%, and the SHCOMP is up +1.06%. In April, the NKY closed down -3.53%, while the HSI and SHCOMP closed down -0.08% and -0.34%, respectively.

In 2014, the NKY and HSI are down -11.6% and -3.10%, respectively, while the SHCOMP is down -3.22%. In 2013, the NKY rose +56.7%. The HSI closed up +2.87%. The SHCOMP closed down -6.75%.

In China, short-term interbank lending rates remain volatile, as the SHIBO 7-day rate rose +5.0 bps to 3.24%, compared to 3.19% the prior day, up from a 2.26% low on March 11th, but down from the February 7th 5.41% recent high.

Regional relative strength indexes (RSI) show Tokyo, Hong Kong, and Shanghai in neutral ranges. The NKY RSI ended at 50.35, compared to 50.90 the prior day, up from an oversold 27.92 on February 4th, the most recent prior yearly low. The HSI RSI rose to 55.98, compared to 51.66 the prior day. The SHCOMP's RSI fell to 49.49, compared to 50.57 the prior session. On June 27, 2013, the index's RSI fell to a low of 15.27, which was also last year's low index close.

In Japan, the NKY closed at 14,405.76, compared to 14,425.44 the prior day, -11.6% below its recent year-end 16,291.31 high and -63.0% below its late-1989 38,915.87 high close. The index opened lower and traded to an early 14,349.87, then improved to 14,390, where it traded narrowly to the close. Most market segments closed lower. Leaders were financials, consumer goods, and utilities, which rose at least +0.35%. Laggards were consumer services, technology, and telecommunications, which fell -0.55% lower. The index closed -11.6% below its recent December 31st 16,291.31 high.

In China, the HSI closed at 22,582.77, compared to 22,352.38 at the prior close. The index traded narrowly higher at 22,450 through the late morning, when the index rallied quickly to 22,550, and then rose to an early afternoon 22,664.37 intraday high. The index eased through the afternoon, finding support at 22,550 late in the session. All market segments closed at least +0.70% higher. Leaders were technology, financials, and basic materials, which rose at least +0.92%. Laggards were consumer goods, telecommunications, and utilities. The index closed -5.55% below its recent December 3rd 23,910.47 high, but +24.2% above its 18,185.59 June 4, 2012 low.

In Shanghai, the SHCOMP closed at 2,047.91, compared to 2,050.73 at the prior close, +5.02% above the 1,950.01 June 27, 2013 close, last year's low. The index traded narrowly lower through most of the session with a mid-morning 2,042.78 and early afternoon 2,056.53 intraday high. Most market segments closed lower. Leaders were oil and gas, health care, and consumer services, which rose at least +0.02%. Financials fell -0.01%. Laggards were telecommunications, basic materials, and consumer goods, which fell at least -0.40%.

In Europe, equities are modestly lower with greater weakness in Milan. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -0.27%, -0.20%, -0.21%, and -0.13%, respectively. The Spanish IBEX 35 is down -0.09%. The Italian FTSE MIB is down -0.69%.

Economic reporting is light, with greater attention to currency and commodity price developments, and prospects for ECB monetary policy easing in June. The dollar is weaker compared to the Euro.

European bourses have recently outperformed U.S. equity indexes. Intraday Euro Stoxx50 relative strength (RSI) is 55.50, compared to 57.29 at the prior close, in a neutral (30-70) range, but better than its recent February 5th 33.57 low, which coincided with its 2014 low. The indexes lowest recent RSI level was 25.77 on June 24th, which marked the 2013 2,494.54 closing low.

The Euro Stoxx50 trades -0.84% below its 3,230.33 April 4th post-2008 high close, and -39.0% below its 5,249.55 March 31, 2000, all-time closing high. From its prior day 3,211.78 close, the index set an early 3,213.46 intraday high, but quickly reversed lower to 3,202, where it has traded since early session. The index currently trades at 3,203.10. Market segments are mostly lower. Leaders are health care, telecommunications, and basic materials, which are up +0.09%. Laggards are financials utilities, and industrials, which are down at least -0.38%.

In 2014, the indexes are higher. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are up +3.03%, +1.63%, +4.65%, and +1.94%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively.

Composite, index, and equity options. Options markets are unchanged at neutral to bullish, compared to neutral to bullish the prior session. Composite options are bullish, index options are bullish, and equity options are neutral. The composite put/call ratio is 0.88, compared to 0.64 the prior day, and worse than 5- and 10-period moving averages of 0.85 and 0.85, respectively. The index put/call ratio is 0.89, compared to 0.43 the prior day, and worse than its 5- and 10-period moving averages of 0.75 and 0.79, respectively. The equity put/call ratio closed the day at 0.88, compared to 0.89 the prior day, and better than its 5- and 10-period moving averages of 0.93 and 0.90, respectively.

NYSE Volume, Breadth Indicators. Volume fell -5.72% to 604.14 million shares, compared to 640.78 million shares the prior day, 0.85x the 706.60 million shares 20-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged by -392 (compared to +1,788 the prior day) or 0.77:1. Up volume was 0.90:1 down volume.

"In Correction" Market Outlook and Distribution Day Count. The market outlook remains unchanged at "in correction". On April 4th, the U.S. equity markets distributed, and the market outlook worsened to "in correction", ending a brief "confirmed uptrend" that began on April 1st. The SPX opened April 3rd at a record 1890.90, up +0.99% from the April 1st 1872.34 open. Today, the SPX opens +0.04% above the April 2nd record close.

Libor, LOIS, Currencies, Treasuries, Commodities:

· USD LIBOR is 0.08790%, compared to 0.08980% the prior day. USD 3-month LIBOR is 0.22535%, up from 0.22385% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

· The US LIBOR-OIS (LOIS) spread is 13.335 bps, compared to 13.185 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 18.000 bps, compared to 16.700 bps the prior day, and down from the December 27, 2011, high of 98.800 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.

· The 3-month Euro basis swap is -7.052 bps, compared to -6.400 bps the prior day, up from a trough of -147.00 bps on December 14, 2011, but far better than a normal -10 bps and -40 bps range.

· German 10-year debt yields are 1.39%, compared to 1.42% the prior day.

· Japanese 10-year debt yields are 0.60%, compared to 0.61% the prior day.

· Spanish and Italian 10-year debt yields are at their best levels since 2005. Spanish 10-year debt yields are 2.85%, compared to 2.90% the prior day. Italian 10-year debt yields are at 2.91%, compared to 2.94% the prior day. Spanish and Italian 10-year debt years peaked at 7.621% and 7.261%, respectively, in July 2012 and November 2011.

· U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.367% and 2.575%, respectively, compared to 0.379% and 2.609% Tuesday. The yield curve narrowed -2.200 bps, with the 2- to 10-year spread at +2.208%, compared to 2.230% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.429% on May 1, 2013, to a high of +2.648% on December 31, 2013.

· The U.S. dollar is mixed, weaker compared to the Euro and Japanese yen, but slightly stronger compared to the British pound. The dollar trades at US$80.074, compared to US$79.989 intraday low and US$80.143 the prior day, and mixed compared to its $79.798 50-day, US$80.183 100-day, and US$80.440 200-day averages. The euro trades at US$1.3722, compared to a US$1.3731 intraday high and US$1.3704 the prior day. The euro trades worse compared to its US$1.3824 50-day and US$1.3741 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥101.78, compared to ¥102.26 the prior day. The yen trades better than its 50-day moving average ¥102.38, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

· Citigroup Economic Surprise Index worsened to -12.70, compared to -6.60 the prior day, better than its recent -45.90 worst on April 7th, but continuing its string of consecutive negative readings since February 18th. The index is mixed compared to its respective -9.86 5-day and -15.40 10-day moving averages. Last year, on June 10th, the index fell to a then 52-week low of -33.26. The index improved and turned positive on July 30th and rose to 53.30 on October 1st, but subsequently fell on dollar weakness to -2.10 on October 31st. It subsequently strengthened to a +72.70 high on January 15th, but then subsequently trended lower and turned negative on February 19th and fell to a -45.90 124-week low on April 7th . After a lag, the CESIUSD correlates with EPS revisions.

· The CBOE SPX Volatility Index (VIX) fell -0.82% to 12.1312.23, compared to 12.92 at the prior close, its lowest close since last August 5th, when the VIX closed at 11.84. The VIX is -9.71% below the 13.43 20-day moving average. Its 30-day high is 17.85. Its 30-day low is 11.88. The index's all-time closing low is 9.31 on December 22, 1993. The long-term average is 20.14.

· The Hang Seng volatility index (VHSI) closed at 15.09, down -2.01% compared to 15.42 at the prior close. The VHSI index trades -1.46% below its 15.22 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

· CBOE SKEW (SKEW) fell -0.78% to 124.30, compared to 125.28 the prior session, above a neutral reading (115-120), but below 130, a level that correlates well with short-term market tops. The recent record high was 143.20 on December 20th. Its recent low was 112.47 on May 25, 2013. Spikes in excess of 130 correlate well with short-term market tops, though not in October or November. The index rarely falls below 110, last on July 31, 2009. The index correlates with market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal.

Tuesday's Trade. On lower and below average NYSE volume, major U.S. equity indexes closed mixed, with record closes on the SPX, DJI, and TRAN. The SPX and DJI closed up +0.04% and +0.12%, respectively, while the Nasdaq and NYSE composite closed off -0.33% and -0.01%. The SPX, DJI, and NYSE composite are higher in 2014. Market breadth was negative, with gainers 0.77x losing stocks. Most SPX market segments closed higher. Leaders were oil and gas, consumer goods, and industrials, which rose at least +0.20%. Laggards were financials, consumer services, and telecommunications, which fell at least -0.12%.

Other notable indexes closed lower. The Russell 2000 (RTY) fell -1.10%, and closed -7.24% below its March 4th record close. The Nasdaq Internet Index (QNET) fell -0.38% and is in correction, -17.1% below its March 6th closing high. The Nasdaq Biotech Index (NBI) fell -0.77% and is in correction, down -15.7% from its recent February 25th record high.

NYSE volume fell -5.72% to 604.14 million shares, compared to 640.78 million shares the prior day, 0.85x the 706.60 million share 20-day moving average volume. On the day, bond markets strengthened. The U.S. 10-year yield opened at the 2.6575%, and traded narrowly lower through 8:30 am, then moved lower through the session to a late 2.6053% intraday low. The yield fell -5.22 bps compared to the 2.6611% prior close.

From its prior day 1896.65 SPX close, June 2014 SPX futures (SPM4) suggested a moderately higher open. In early trading, the index rose to a mid-morning 1902.17 intraday high, but fell back to breakeven by early afternoon, where it traded narrowly to the close. The index closed at 1896.65, a 2nd consecutive record closing high. The index closed +76.5% above the 1074.77 October 4, 2011, intraday low, the bottom of the most recent correction.

The DJ Transportation index (TRAN) rose +0.46%, compared to the DJI's +0.12% gain. Both indexes closed at new record highs, and in accord with Dow Jones theory, confirmed an upward trend. From its prior 7,867.45 close, the TRAN rose to a mid-morning 7,918.92 intraday high, then eased back to 7,900, where it traded narrowly to the close. The index closed at 7,903.51. Volume rose +0.57% to 10.713 million shares, compared to 10.652 million shares the prior session, and 0.86x the 15-day moving average volume. The TRAN closed +2.86% and +4.15% above its 20- and 50-day moving averages, and +6.14% and +11.3% above its respective 100- and 200-day moving averages.

Market volatility fell to levels most recently seen in early January as the -0.82%, as the CBOE SPX volatility index (VIX) closed at 12.13, compared to 12.23 at the prior close. The VIX set its early 12.74 intraday high, then fell to a mid-morning 12.05 intraday low. The index moved narrowly to its lower close. The VIX's all-time closing low is 9.31, on December 22, 1993. Its record high is 89.53 in December 2008. Its lifetime average is 20.01. The CBOE put/call SKEW fell -0.787% to 124.30, compared to 125.28 the prior session, above a neutral 115-120 range, but below 130, a level that correlates well with short-term market tops.

The market's technical factors were little changed. The SPX relative strength (RSI) improved to 60.69, compared to 60.43 the prior day, above the middle of a neutral range and better than an oversold 31.24 on February 3rd. The RSI is also down from an overbought 71.26 on December 31st, when the SPX closed at an earlier record high, but above earlier oversold levels of 35.14 on August 27th and 39.19 on October 9th. This week, the SPX, DJI, Nasdaq, and NYSE composite are up +1.01%, +0.80%, +1.43%, and +0.91%, respectively, compared to last week, when the SPX, DJI, and NYSE composite closed up +0.81%, +1.36%, and +0.97%, respectively, while the Nasdaq closed off -0.09%. In May, the SPX, DJI, Nasdaq, and NYSE composite are up +0.72%, +0.81%, +0.38%, and +0.71%, respectively. In April, the SPX, DJI, and NYSE composite closed up +0.62%, +0.75%, and +0.94%, respectively, while the Nasdaq closed off -2.01%.

In 2014, the SPX, DJI, and NYSE composite are up +2.66%, +0.84%, and +2.91%, respectively, while the Nasdaq is down -1.11%. In 2013, the SPX, DJI, Nasdaq, and NYSE composite closed up +29.6%, +26.5%, +38.2%, +23.2%, respectively. All closed at least +5.91% higher in 2012.

KBW Bank Index (BKX). On lower and below average volume, the BKX fell -0.35% to 68.74, compared to 68.98 at the prior day's close, its 24th consecutive close below 70.0, -5.72% below its 72.91 March 20th post-2008 closing high. The index traded to a mid-morning 69.09 intraday high, but reversed lower by late morning and fell to a late session 68.70 intraday low. Volume fell -18.2% to 32.124 million shares, compared to 39.258 million shares the prior day, and 0.69x the 46.378 million share 15-day moving average.

This week, the BKX is up +1.13%, compared to last week, when the BKX closed down -0.85%. In May, the BKX is up +0.45%, compared to April, when the BKX closed off -5.34%. In 2014, the BKX is down -0.75%, compared to the SPX's +2.66% gain. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise.

The BKX is now +16.1% better than the June 24, 2013 59.19 close, its worst since May 13, 2013. The index crossed above 50 on December 17, 2012, 60 on May 15, 2013, and 70 on January 8, 2014, but then dropped back below 70 on January 24th, which persisted until March 6th. On April 10th, the BKX fell below 70.00 and then eased consistently to the Mary 6th 67.13 closing low, its lowest close since early February. The BKX closed +111.1% above the 32.56 intraday low on October 4, 2011, the bottom of that year's correction. Large-cap bank stocks have outperformed the broader market's rebound, with the SPX up +76.5% in the same period.

The BKX index closed -43.2% below its February 20, 2007, record 121.06 high. The BKX is up +269.2% from its 18.62 March 6, 2009, closing low, its low during the 2008-09 financial panic.

The directional movement indicator improved to -3.405, compared to -4.203 the prior day, its 26th consecutive negative reading. Relative strength eased to 48.53, compared to 50.25 the prior day, in the middle of a neutral range, up from the recent 32.95 low on February 3rd, but down from an overbought 75.56 and 71.88 on January 9th and 10th, respectively. The recent low RSI level was 31.08 on November 14, 2012, which is also the date of the BKX's 2012 closing low. Next resistance is 69.62; next support is 68.60.